Debt Management Plans: Questions to Ask to Avoid Scams

Before you sign up for a debt management plan (DMP), ask these questions.

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In a debt management plan (DMP), the company offering the plan works with you and your creditors to develop a payment plan for your unsecured debts. The consumer deposits money into an account each month which the company uses to pay the consumer’s bills pursuant to the plan. (To learn about how a DMP works, see Debt Management Plans.) Unfortunately, it's far too easy to fall into a DMP scam, sign up for services you really don't need, or end up paying lots of money to the DMP agency that could otherwise be used to pay your creditors.

Before you sign up for a debt managaement plan, ask these questions:

1. Are you an accredited nonprofit credit
counseling agency?

If you are considering a DMP, only work with a legitimate
nonprofit credit counseling agency. Check on nonprofit status with the Internal
Revenue Service. Make sure the company is accredited, usually by the Council on
Accreditation (COA) or the International Organization for Standardization
(ISO). Find out if any complaints have
been filed against the company with your state attorney general’s office, the
Better Business Bureau, or local consumer protection agencies. Ask if the
agency is a member of the National Foundation for Credit Counseling or the
Association of Independent Consumer Credit Counseling Agencies – members are
held to strict quality, financial, and ethical standards. (To learn more about
picking a quality credit counseling agency, see Nolo’s article Choosing a
Credit Counseling Agency.)

2. Are your
counselors certified?

The counselors working for the agency should be certified.
This means they have passed a certification exam that tests for understanding
in areas such as counseling, budgeting, credit and consumer law, debt
management, and bankruptcy. The exam should be administered by an independent
agency.

If the agency refuses to provide you with free, detailed
information about their services, run the other way. Ditto if the agency first
requires you to provide personal information such as your income, credit card
account numbers, or balances.

4. Do you
provide services other than a DMP?

A legitimate credit counseling agency will provide budgeting
advice, financial counseling, referrals to other agencies, and advice about many
other options for digging yourself out of debt. Beware of any counselor that recommends the DMP before completing a
comprehensive counseling session, pushes the DMP as the only option for you, or
reveals that he or she is compensated if you sign up for the DMP.

5. Will
you teach me budgeting and money management skills?

As part of the DMP, the agency should teach you how to
budget and manage your money. If the agency tries to enroll you in a DMP
without first providing you with these skills, go elsewhere.

6. Are your
services free? If not, what are your fees?

Many legitimate consumer credit counseling
agencies provide free services, or charge fees based on a sliding scale
depending on income. Some agencies charge for services – usually an up-front
fee to set up the plan and then a monthly administration fee. These fees should
be reasonable – no more than $50 to set up the plan, and no more than $50 per
month to administer the plan (less if your monthly payment to creditors is less
than $500).

7. Do you require “voluntary contributions” or
“donations”?

Some agencies try to hide the fees they
charge by calling them things like “voluntary contributions” or “donations.” If
the agency is not up-front about the fees it charges, or appears to be hiding
fees, take your business elsewhere.

8. Do I have to make payments into the DMP
before my creditors accept the plan?

You should not make any payments into the
DMP until you have independently confirmed that your creditors have accepted
the plan. If the agency offering the DMP requires otherwise, it’s not a
legitimate company.

9. How much
will my monthly deposit be?

Before you enroll in the DMP, find out how much your monthly
payment will be to creditors. If you can’t afford it, don’t sign up.

10. What debts will and won’t be included in
the DMP?

The credit counseling agency should tell you, in writing,
which debts will and will not be included in the DMP. If it won’t provide this
in writing, then go elsewhere.

11. Will you provide me with a formal, written
contract?

Before enrolling in a DMP, get everything in writing. If the
company won’t put all details of the agreement in writing, find another agency.

12. How are your employees paid?

Ask how the company’s credit counselors are compensated. If
the counselors receive a commission for enrolling customers in a DMP, be wary. And
if the company won’t divulge how employees are compensated, go elsewhere.

13. Do you provide detailed account information
each month?

The agency providing DMP services should provide you with
monthly reports detailing the status of your accounts. If this isn’t provided
as part of the plan, use another agency. Even if the company does provide
monthly statements, you should periodically check with your creditors to make
sure they are getting paid on time.